Despite the economic downturn and industry consolidation, competition is forcing banks to increase IT spending this year by an average of 4 percent, according to a report released today. Overall IT spending within the U.S. banking industry this year is forecast to total US$32 billion.
At the largest banks, IT budgets this year will account for 20 percent to 25 percent of their overall budgets, with medium-size banks spending 12 percent to 15 percent of their budgets on IT, according to the report, from Cambridge, Mass.-based Celent Communications LLC. The report is based on a poll of CIOs and individual business units at 25 of the 100 largest banks in the U.S.
In contrast, overall IT spending in the U.S. dropped sharply from the fourth quarter of 1999 to the same period in 2001, according to a poll by Marcoccio Consulting. The results of the poll of 1,200 U.S. companies by the Westboro, Mass.-based consultancy showed that IT spending dropped 26 percent, from $307 billion to $227 billion during the period. As a total percentage of revenue, IT spending dropped from 27 percent to 15 percent, a 44 percent drop.
The Celent report shows that, on average, large banks are spending more than small banks as a percentage of their total expenses, with the top four banks in the world each spending more than $2 billion on IT this year. Citigroup Inc. tops the list of big spenders, with $5.1 billion allocated to IT this year, Celent said.
"In part, banks have little choice in this; a very large proportion of their spending is on maintaining existing infrastructure," said Octavio Marenzi, the report's author. "Banks are also increasingly viewing technology as a competitive differentiator, as a tool with which to wrest market share from their competition."
Banks face competition from outside industries such as insurance companies and brokerages, which were afforded more freedom to expand into other services by deregulation last year.
And, while the banking industry has consolidated -- the number of banks in the U.S. has dropped from 14,482 in 1984 to 8,147 in November 2001 -- more money is being spent on systems integration and specialized processing systems for a growing number of credit card customers and multistate processing systems, Marenzi's report said.
According to the report, other top banks enamored with IT this year are J.P. Morgan Chase, which will spend $4.7 billion; Bank of America Corp., which is spending $3.3 billion; Wells Fargo & Co., which has set aside $2 billion; Bank One Corp., which is spending $1.9 billion; Wachovia, which has budgeted $1.1 billion for IT; and FleetBoston Financial Corp., which plans to spend $900,000.
"What you hit on with integration is particularly true for Bank One," said Stan Lata, a Bank One spokesman. "We're trying to complete two major conversions this year."
Chicago-based Bank One announced in November that it plans to add 600 IT workers by the end of this month, boosting the size of its 4,000-person technology department by 15 percent.
Bank One is moving from a half-dozen online customer service platforms that are now maintained through outsourcing agreements to a single proprietary system, an effort to save money after losing $511 million in 2000.
Marenzi said that in many cases, IT dollars were wasted on projects that were never completed or failed to show a return on investment.
"Projects go awry and never get called to task until hundreds of millions of dollars are wasted," Marenzi said. "What's needed is better oversight of projects. It becomes very difficult sometimes to cancel projects. So many careers are on the line, and they don't want to be associated with a failed project."
Kathy Searle, director of corporate affairs at FleetBoston, said IT spending this year would remain flat, with the bulk of the $900 million going toward driving "revenues through cross-selling initiatives and also focusing dollars to improve the customer experience."
Customer relationship managment initiatives at Fleet this year will include voice guidance and Web-enablement technology as well as lead management software which allows service representatives to find financial experts faster to help customers.
On a related note, consultancy McKinsey & Co. released a report that showed that despite generally disappointing results from IT spending, certain investments at banks, "particularly in back-office processes, have boosted labor productivity. Check-imaging technology has replaced microfilm, thereby reducing labor and storage costs by as much as 40 percent and check-retrieval time by as much as 75 percent."
The report also said automated voice response units have cut the number of call center representatives at banks by almost half.
Computerworld's Matt Hamblen contributed to this report.